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What happens to your fixed deposit if your bank defaults?

By Finserv MARKETS - Aug 28,2019
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What happens to your fixed deposit if your bank defaults

Dinesh had just invested his money in a fixed deposit with a bank in his neighbourhood, on the suggestion of a colleague from work. The bank was offering him an attractive interest rate, however he was still apprehensive. News about a well known bank defaulting recently had Dinesh scared if his money was safe. Being the only earning member of his family, he could not afford to take a risk. Did he take the right decision? Would it not backfire? Were his returns guaranteed in the event of any uncertainty?

Dinesh need not worry. Nor do you. In India, deposit insurance covers all commercial banks, local area banks, regional rural banks and co-operative banks. In the event of a bank default, the Deposit Insurance and Credit Guarantee Corporation (DICGC) pays back the insured amount to the depositor. The insurance limit however, is restricted to a maximum of ₹1 lakh per depositor per bank. A 2017 annual survey by the International Association of Deposit Insurers (IADI), in India revealed that the deposit insurance in India is a mere $1,543 ( conversion rate of ₹64.8 to a dollar). In most countries across the world, the insurance covers 60 to 70 percent of the total deposits- Indonesia($1,47,000), Brazil ($76,700), Malaysia($55,700), Mexico($100,000)and Canada, Switzerland and France(upwards of $70,000) per depositor. The Federal Deposit Insurance Corporation in the U.S. offers an insurance coverage of $250,000.

So far in India, the main beneficiaries of the deposit insurance scheme have been urban cooperative banks, many of which fail. In 2017, DICGC settled claim worth more than 28 crores(2). In the same year, the Financial Resolution and Deposit Insurance bill was tabled in the parliament, proposing to allow the use of depositors money in case of a bank default. The bill was dropped in 2018, since it would have taken away the life-long savings of investors. Not only this, their faith in the banking system would have been shattered. With most banks in India, struggling with band loans, the list of defaulters has only been growing and this could be a red flag that needs to be addressed promptly with stringent measures by the RBI.

Currently, every depositor in a bank is insured upto a maximum of Rs.1,00,000 for both principal and interest amount held by him in a fixed deposit, in the same capacity and same right as on the date of liquidation or cancellation of a bank’s license or the date on which the scheme of merger or reconstruction comes into force. You can enquire from your bank branch about these measures. The DICGC while registering the banks as insured banks furnishes them with printed leaflets for display giving information relating to the protection afforded by the Corporation to the depositors of the insured banks.

For example, if an individual has a bank deposit with a principal amount of Rs.95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs.99,000. If the principal amount is equal to, or above Rs. 1 lakh, the accrued interest would not be insured, because the amount is over the insurance limit. If the fixed deposits are in different types of ownership or are deposited into separate banks they would then be separately insured. Let’s say you have bank deposits in bank A and Bank B, both of which shut business on the same day, your deposits will be insured separately.

With such protection, it is then safe to invest in a fixed deposit. Not only do they offer flexible tenures as per your financial requirements to ensure liquidity when you need money, they offer a host of other benefits as well. Attractive interest rates by banks, slightly higher returns for senior citizens who might require greater liquidity in their old age is a big plus. Not only this you can also take a loan by using your bank deposit as a collateral. Technology has made opening a fixed deposit easier.

Take for instance the Fixed Deposits available on Finserv MARKETS where you just need to log in, decide the amount you want to invest, upload a few necessary documents and wait for verification from them. Once done, make the payment and see your money grow. No lengthy documentation, no queues. No need to worry about bank default anymore. Your money is as secure as it can be in a fixed deposit. So relax and carry on.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs. We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522